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Burberry’s CEO Fights to Gain Luxury Customers

London Mayor Boris Johnson tried on a scarf at a Burberry store opening in Shinjuku, Tokyo, last year. The fashion brand is working on wooing shoppers in the country.
Photo:
Andrew Parsons/i-Images/Zuma Press

LONDON—When Burberry Group PLC opened a new flagship store in Tokyo last fall, guests from the luxury label’s U.K. home included London Mayor Boris Johnson and a complement of artisans who talked up the work behind Burberry’s products and provided on-the-spot monogramming.

Wooing spenders in Japan, the world’s second-largest luxury-goods market after the U.S., is increasingly important for Burberry. Growth has slumped in large markets such as Greater China and the U.S., piling pressure on Mr. Bailey to find new drivers. The company’s shares fell 27% last year, their steepest annual decline since 2008.

“There needs to be some response to market conditions, and we haven’t seen that yet,” said Liberum analyst Tom Gadsby. “I hope they will come out with a strategic business plan, but at the moment it’s not a growth business.”

Mr. Bailey, who turns 45 years old next month, was Burberry’s longtime creative chief when he added the role of CEO after Angela Ahrendts’s departure for Apple Inc. in May 2014. The soft-spoken Yorkshireman took the helm just as Burberry was steering into rough waters.

The company enjoyed strong growth in China after buying out its local licensee’s 50 stores in 2010, closing most of the acquired locations and opening new ones in desirable areas. It now has 65 stores in mainland China. It also thrived in Hong Kong, where it has 14 full-scale stores.

That heavy presence turned into a burden for Burberry when currency gyrations and political unrest started to slow luxury sales in China and Hong Kong. The situation came to a head in the second half of last year: Burberry’s comparable retail sales swung to a 4% decline in the quarter ended September, from 6% growth in the prior quarter. Bernstein analysts expect Burberry to report a 1% decline in same-store sales for the fourth quarter when the company gives its sales update on Thursday.

Relative to peers such as LVMH Moët Hennessy Louis Vuitton SE and Prada SpA, Burberry is underrepresented in Europe and Japan, which have seen an influx of Chinese shoppers. The number of Chinese shoppers in Japan rose by 50% in 2014 and again in 2015, said HSBC analyst Antoine Belge. Yet Burberry gets just 2% of its revenue from Japan, compared with an average of 10% for the broader luxury sector, according to Liberum.

Mr. Bailey aims to change that. Last year, Burberry took control of its brand in Japan by ending a local licensing agreement, in line with a strategy Ms. Ahrendts had laid out. Still, critics worry Mr. Bailey will struggle to align the brand there with Burberry’s upmarket global approach, as the licensee had focused on cheaper clothes, skewed toward younger shoppers.

Burberry’s Chief Executive Christopher Bailey at a Burberry show in London, earlier this year. Mr. Bailey also is the creative chief for the fashion brand.
Photo:
Dave Benett/Getty Images

“It was more like an upper-class H&M,” said a former Tokyo-based senior Burberry executive, referring to Hennes & Mauritz AB’s fast-fashion chain.

Securing space to expand beyond its current six stand-alone Japanese stores will be another challenge. As global luxury brands poured money into the country, prime rents in Tokyo climbed 48% between the end of 2012 and the end of 2015, according to real-estate services firm CBRE.

Burberry declined to comment or to make Mr. Bailey available for this article.

Elsewhere in Asia, Burberry has been renegotiating rents in hard-hit Hong Kong, along with reducing store space and adjusting its product assortment. The company has reiterated its commitment to mainland China as well.

At Burberry, Mr. Bailey has pushed through £25 million in cost cuts since June, in part by reducing the staff through attrition and cutting travel budgets. The company’s lower performance has trimmed executive bonuses.

Last year Mr. Bailey simplified Burberry’s branding, scrapping the Prorsum, London and Brit brands in favor of a single Burberry label. The same sentiment led him to slim down Burberry’s range of trench coats. His concept of an in-store “scarf bar,” consolidating scarves in one place and offering customization services, has boosted sales of that key accessory.

The CEO grabbed headlines in February with his decision to end monthslong lead times on Burberry’s runway collections, making them immediately available to buy after a show. The collections make up just 5% of revenue, but the move, a first for luxury fashion, reinforced Mr. Bailey’s reputation for innovation.

A Burberry store in the Causeway Bay shopping district of Hong Kong.
Photo:
Xaume Olleros/Bloomberg News

Despite these changes, performance has remained weak. The company in January reported flat comparable sales for the third quarter. HSBC’s Mr. Belge said Mr. Bailey’s brand-streamlining efforts and the runway-collection change won’t have a meaningful impact on sales or costs, although a weaker pound is expected to help.

Expectations are mounting ahead of the company’s full-year earnings report in May, with shares up 16% since the company’s third-quarter sales update in January. Mr. Bailey has said he would detail plans for improved efficiency and higher revenue. Investors also are hungry for signs that Burberry’s constrained profit margins might improve for the first time since fiscal 2013.

“Burberry shares have become a ‘show-me story’ on the margin front but improvement seems unlikely,” said RBC analyst
Rogerio Fujimori
while downgrading his rating on Burberry to “underperform” last week.

Mr. Bailey is backed by a strong management team including the company’s Chief Financial Officer
Carol Fairweather
—who has been with Burberry since 2006—and Chief of Strategy and New Business Development
Matthew McEvoy,
a former Goldman Sachs executive who started at Burberry in 2002.

Still, critics question whether the company has saddled Mr. Bailey with too much responsibility through the slowdown.

“I would think it would be very difficult to be both the head designer and running the company,” said David Herro, a portfolio manager at Harris Associates, a top-20 Burberry shareholder. “Those are two very different skills.”

Exane BNP Paribas analyst Luca Solca said the dual role “cannot go on like this.” Given the tough macroeconomic backdrop, he said, “you need the full energy of the person to be carrying out such an important role.”